Professor Alan Barrett:

I will take a stab at it. To the extent that banks are profit-maximising agencies and there are productive possibilities out there that will be profitable, they clearly have an incentive. One of the great worries is that there is a generation of people working in Irish banks who have loaned only into property and were very comfortable doing that. They were not the sort of bankers who were good at appraising projects and making sensible decisions about them. This is a legacy issue which we have discussed here before. The question is not whether they have an incentive but whether they have the capacity to assess the risk of projects and make decisions. There is still a sense that bricks and mortar seems much easier for these people.

To the extent that prices are on the way up again, if that is true, one would be terrified that default mode would be restored, lending into the old reliable, and that the productive possibilities are not there. We have touched on some of what needs to be done. Clearly there is a need for policy instruments on housing to ensure the bubble does not get out of control again. Proactively engineering lending in a particular direction will be very difficult in a situation where we have only two banks. There is a real fear that these guys will be able to make their money without extending themselves, which is what they did to a great extent in earlier decades when we had just two banks.